Fear and greed are powerful emotions.
Left unchecked they have the power to destroy families or businesses.
It is important to understand how to cope with and prevent the crippling effect that either may have upon you.
My experience of dealing with many thousands of clients over the years when discussing investments, is that they are fearful (or worried) mainly because of their unfamiliarity with investments.
They have this fear of the unknown on their minds when they complete their psychological risk profiles, the results from which determine what type of portfolio is “suitable” for them.
I have often wondered if this compliance procedure is the correct process to follow, or if it is a disservice to clients.
Allow me to explain with an example of two employees: Jack and John.
They are both 39 and turn 40 this August. They are both paid the same salary of £40,000, and they are both happy in their work and will carry on working for their employer until they reach their retirement age of 65.
Let’s also assume that they both have savings of £55,000 and that there are no pension benefits to complicate my example.
They see the firm’s financial adviser, who completes a fact find and risk profile; after this he informs them that:
Jack – has a high-risk profile and his portfolio will fully invest in equities and estimates that over time Jack will achieve 10% growth.
John – has a low-risk profile and will invest in a low risk portfolio achieving 5% growth.
They have both chosen to save around £500 a month, as what with holidays and their mortgage payments, that is what seems affordable.
They are quite relieved that their fears of investment have been highlighted and dealt with.
They can both now relax and breathe easy; they can carry on with their lives knowing that everything is fine.
The advice would seem to be compliant, but is the advice of any real use to them?
Their objectives are clear – to retire at 65 with a pension that buys the equivalent £40,000 today. To do this they will need savings of at least £800,000 in today’s money.
They haven’t really considered the damage that charges and inflation, and perhaps poor investment performance, can do over the years.
We have allowed a deduction of 5% from the assumed growth rates to allow for this. If your investments are with a direct sales wealth manager, then you may have to allow for a bigger deduction.
To achieve their stated objectives, both will have to save far more than they imagined.
John, who is risk averse, would have to increase his savings to over 70% of his take home pay, while Jack would need to save about 33% of his.
There is a clear gap in expectations. The point of the example is to show that all of us need to spend more time on planning our futures and that saving an arbitrary amount without any form of proper planning is unlikely to achieve the lifestyle you wish for.
Almost all clients can improve their financial future, so speak to an independent financial adviser, as with proper planning you can improve your financial position NOW to assist you live in style later.
Remember – the cautious, low-risk portfolio provides a barrier to achieving your desired retirement lifestyle!
Past performance is not necessarily an indication of future returns, and future performance is not guaranteed.
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